The adoption of international financial reporting standards (IFRS) and loss avoidance in turkey

Abstract

Abstract Purpose The purpose of the study is to present evidence on the International Financial Reporting Standards (IFRS) adoption and earnings quality relationship on an emerging country context focusing on firm characteristics. Design/methodology/approach To measure loss avoidance, the earnings distribution approach is followed. Data includes all the nonfinancial firms listed on the Borsa Istanbul (BIST) for the period covering 1998–2010. The sample is divided into subsegments according to size and leverage, considering the potential impact of different financial reporting incentives. Furthermore, mandatory and voluntary adopters are examined separately. Findings The results indicate lower loss aversion in the post-IFRS period. Furthermore, we found that incentives dominate accounting standards in determining financial reporting quality. The decrease in loss aversion after IFRS adoption is more significant for large firms compared to small firms, low leverage firms compared to high leverage firms, and for mandatory IFRS adopter firms compared to voluntary IFRS adopters. Originality/Value Research provides inconsistent evidence on the relationship between IFRS adoption and earnings quality. Turkey represents an interesting environment to test the impact of IFRS adoption, as the Turkish accounting system has followed a historical path from a Continental European accounting system to an Anglo-Saxon accounting system. The current Turkish accounting system exhibits features of both these systems. Additionally, IFRS adoption was optional in 2003 and mandatory in 2005 in line with EU regulations, and the changes in the reporting environment are supported by the regulatory developments and institutional changes in Turkey.